Australia Introduces "Kill Switch" for Computer Share Trading

The Australian government introduced new market trading rules, including a "kill switch," to protect investors from volatility.

SYDNEY -- The Australian government
introduced new market trading rules, including a "kill switch",
on Tuesday to protect investors from volatility caused by
controversial super-fast computer-driven trading.

The government also launched further inquiries into high
frequency trading and so-called dark pool trading, which allows
shareholders to trade amongst themselves away from the main
"lit" market without revealing their identity or display prices.

Electronic trading has come under global scrutiny since it
was blamed for the "flash crash" in the Dow Jones Industrial
Average in May 2010 when the index plunged 1,000 points, or 9
percent, and regained most of those losses in less than 20
minutes.

The Australian government's package of new market integrity
rules includes the use of "kill switches" which could be used to
immediately stop computer-generated, or algorithmic, trading in
the event of sudden or untoward market movements.

The rules, which were recommended by the Australian
Securities and Investments Commmission, also require dark pools
to offer a "meaningful price improvement" over the traditional
"lit" market.

"These new rules will help to reduce the risk of market
volatility from high frequency trading and provide increased
investor protection for retail investors and others trading in
dark pools," Financial Services Minister Bill Shorten said in a
statement.

The U.S. Securities and Exchange Commission is mulling the
effectiveness of "kill switches" as part of a broad review of
technology issues after a major glitch at Knight Capital
on Aug. 1 that led to a $440 million trading loss that nearly
bankrupted the firm.

The error was the third high-profile technology problem
experienced by major market players this year. The first hit
BATS Global Markets during its attempt at an initial public
offering, and the second major glitch plagued Nasdaq during
Facebook's market debut.

In Australia, ASIC is looking into a spike in the price of
several major stocks in the benchmark S&P/ASX 200 index
at the start of trading one day last month.

High frequency trading, which allows traders to buy and sell
stocks at microsecond speed using automated systems, accounts
for 30 percent of all daily business on the Australian Stock
Exchange and the bourse's managing director, Elmer
Funke Kupper, said in a statement he supported the new rules.

Both the ASX and rival Chi-X, owned by Nomura Holdings Inc
, will be required immediately to enforce an extreme
trading range rule, aiming at preventing prevent wild swings in
securities.

The other rules will come into force over six to 18 months.

Shorten also launched two task forces to further probe the
impact of dark pools and high frequency trading on the integrity
and quality of the markets.

There are currently 15 dark pools registered with ASIC, most
run by large mulitnational broker firms.

ASIC has proposed a A$50,000 minimum threshold for share
trading in dark pools, while the ASX has suggested a A$25,000
threshold. All share trades under the minimum threshold would be
directed to the public "lit" market.